27/01/2011
The commercial property investment market was generally out of favour amongst financial advisors in the second half of 2010, the majority of whom were correctly forecasting greater returns from equities and bonds. Partly as a result of this, some funds saw increased redemptions and the price of both property company shares and investment trusts generally drifted downwards.
The fortunes of those holding direct property assets were more mixed. Well let properties on long leases such as supermarkets generally held their own; institutional quality property moved out slightly, as fund managers voiced fresh concerns about the growth prospects of the rental streams. The biggest falls in prices were seen in the regional office market especially where the occupational lease was relatively short; the biggest gains were generally in central London.High Street retail had a mixed six months, with well let smaller (more affordable) units attracting strong interest from private investors. Great excitement was generated by a handful of transactions on Bond Street, some of which achieved yields as low as 2.75% (that’s over 36 years purchase). The yields reflected a belief that Bond Street is the best retail pitch in Europe, thus will always attract tenants and outperform in terms of rental growth. So we would suggest that demand for properties in this location formed part of a ‘flight to safety’. We would anticipate yields on Bond Street starting to gradually correct towards the historic norm in the latter part of 2011.
So what of the future? We anticipate the drivers in the spring of 2011 to be: the fear of rising interest rates; continued shortage of bank finance; a general hardening of attitude amongst bankers, forcing greater numbers of properties to be sold; continued pessimism in relation to the occupier market and a desire for security conflicting with the possibility of generating superior returns by adopting a contrarian stance.
We anticipate more tenants on short leases seeking to buy their freeholds. Demand from investors for well let properties on long leases may continue but they will be cautious about the potential impact of rising interest rates on capital values on these ‘gilt’ style investments, that are often more akin to financial instruments than property deals. Demand for retail properties reduce as the impact of the Internet and online sales increase. Currently 10.5% of retail sales are online and we have seen a growth of over 30% in the last twelve months. This online spending factor combined with lower levels of disposable incomes and an increasing awareness of travel costs suggest a dip in the retail property market is likely.
For those seeking enhanced returns, many secondary offices and industrials are already selling for less than their replacement cost, and in those locations it is unlikely there will be any new supply for the foreseeable future. Provided you are confident in the levels of future occupational demand in that location and fully understand both the holding and refurbishment costs, for the brave, the second half of 2011 could be the buying opportunity of the decade.
To discuss anything you have read in the above article, please contact our Investment team.
